Cost of building has increased significantly in London, new global study shows

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Cost of building has increased significantly in London, new global study shows

The average cost of construction in central London is now higher than Switzerland, the most expensive country in the world to build, according to a new international costs report.

The annual study, which benchmarks building costs in 43 countries across the globe, found that relative construction costs have been affected by currency fluctuations, commodity prices and increasing demand for development in many recovering economies throughout the year.

The strength of the Sterling relative to the Euro and accelerating price inflation have seen the cost of building in the UK overall increase significantly, while the continuing devaluation of the Yen has led to the relative cost of building in Japan drop below that of the United States, International Construction Costs Report by Arcadis shows.

It points out that viewed in isolation, central London ranks top in the relative cost league, reflecting high specification levels seen in many London developments and the fact that the UK construction industry has never been as productive as its US and European peers, with legal frameworks and capability to deliver the schemes causing major delays.

High costs of development in London are also the result of an acceleration of client demand in assets, such as prime residential, which are reaching a capacity ceiling, and have led to significant cost inflation over the past year, the report explains.

While established high cost locations Switzerland and Denmark have held their places at the top of the cost league, European countries dominate the top 10. The firm says this is due, in part, to the ongoing economic recovery in the likes of Germany and France which is gradually translating into contractors demanding more for their services.

Elsewhere, currency devaluation in many emerging markets means that relative costs have dropped considerably in these areas. Costs in countries such as India, Indonesia, Malaysia, Thailand and Vietnam are now around 35% less than that of the UK.

‘The cost of construction in London has been heavily impacted by high specification levels in many of the city’s developments, topped off by the fact that its prime residential property is reaching a capacity ceiling, leading to significant cost inflation over the past year,’ said Simon Rawlinson, Arcadis’ head of strategic research.

‘This is bolstered by the UK construction industry being much less productive than its US and European peers and the fluctuation in global currencies, especially the strength of the Sterling relative to the Euro. Given that this is unlikely to cease, the UK is forecast to grow around three per cent in 2015,’ he explained.

‘Extending beyond the UK, growing economic stability in parts of the Eurozone has led to European nations dominating the top ten for building costs. This is at the expense of some Asian states such as Singapore, Macau and Japan, where currency devaluations have seen them drop down the rankings. Japan, in particular, has seen the relative cost of construction fall considerably over the last year and the market is now more competitive than that of the United States,’ he added.

A regional breakdown shows that in Europe the ongoing crisis in the Eurozone impacted heavily on the construction sector and it could be a long time before the industry in many peripheral economies rallies to anything like the levels seen pre-2008. Furthermore, while optimism about the prospects for the Eurozone waning, poor results for a number of key countries in the second and third quarters of the year have underlined the fragility of the recovery. Caution should be adopted for those operating or looking to invest within the sector.

Overall, the construction sector in North America has enjoyed a similar recovery in 2014 as in 2013. The report says that the robust housing market recovery continues to blossom as do shale gas extraction and the unconventional oil and minerals boom in the US and Canada, all of which make for a more buoyant construction market.

Overall demand is on the up in the region and, with costs reducing for energy intensive manufacturers, the industrial sector has seen significant growth. High demand for residential property in central locations means that we are seeing large developers, who traditionally focused on the over built office market, switching to high-end residential in pursuit of profitable development opportunities.

Despite increasing instability in the wider Middle East, three trends are having a positive influence on levels of construction spend in the Gulf Region. The first is the continuation of high levels of investment on social infrastructure to service the growing population; the second is investment in economic diversification, exemplified by ambitious plans for transport investment such as the US$200 billion GCC rail network which is to link Saudi Arabia, Kuwait and Qatar.

Meanwhile, event driven construction is also underpinning huge levels of growth in the region and, with Dubai securing the 2020 World Expo on top of Qatar’s World Cup success, and the firm says this is a trend that will only strengthen over the next few years.

Whether the recent weakness in oil prices has a short or medium-term impact on construction spending plans will become clearer during 2015. Of the OPEC members, Abu Dhabi, Qatar and Saudi Arabia are amongst the best placed to be able to continue to fund budget commitments, but with oil prices falling it is possible that current and capital spending priorities may come under review in 2015.

In China, the gradual shift to a consumption-based economy means that the huge growth in construction that we have witnessed over the last ten years is unlikely to continue in the long term. Elsewhere in Asia, construction markets had another strong year, particularly in Japan, where the stimulus associated with one of the three ‘arrows’ of Abenomics has had a significant impact.

Hong Kong and Singapore also saw strong growth throughout the year, driven by a combination of robust housing markets and high levels of infrastructure spend.